AKM ZAMIR UDDIN

The Bangladesh Bank has injected a record $8.37 billion into the banking system in just less than seven months of the current fiscal year in order to restore stability in the foreign exchange market.

The sales of the American greenback to local banks have already surpassed the $7.62 billion, an all-time high, that the central bank supplied in the entire financial year of 2021-22.

And the US dollar sales are expected to continue at the current pace or even accelerate if the central bank’s stance on the exchange rate and the lending rate cap continues, warn a number of economists.

The record injection of US dollars, however, has hardly contributed to watering down the ongoing volatility in the forex regime, which has stemmed from the fast depletion of the foreign currency reserves amid a surge in import bills fuelled by escalated commodity prices globally.

The reserves stood at $32.47 billion yesterday, down 28.16 per cent from a year earlier.

The reserves might shrink further if the central bank does not allow the market to determine the exchange rate of the taka against the dollar and remove the interest rate cap of 9 per cent on loans, said a number of economists.

“The stance that has been taken by the central bank will deepen the volatility. If it does not allow the floating exchange rate, there will be no other option but to inject a large amount of dollars into the market,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

The former economist of the International Monetary Fund raised the alarm as the demand for consumption among both borrowers and a section of people has still been high despite higher inflation in the past 10 months.

“There is a pent-up demand as imports have decreased in recent months to some extent. But if the floating exchange is allowed, the local currency will depreciate further, which will go on to suppress the demand,” he said.

The exchange rate of the taka yesterday stood at Tk 107 for each dollar, down 24.41 per cent year-on-year, data from the central bank showed.

But Mansur disagreed.

“The rate is already depreciating in the forex market and banks are buying the US dollars at as high as Tk 115 each. It is not Tk 106 or Tk 107 in the market. The pressure is building up.”

“The taka may depreciate suddenly. That risk is very much there because the current exchange rate can’t be maintained at some point. This is the reality.”

Earlier, the central bank tried to control the exchange rate but it did not work after banks witnessed shortage of US dollars to settle import bills. As a result, the taka has lost its value by at least 20 per cent in the past several months.

But it could have avoided such a sharp depreciation and the erosion of the reserve had the market been allowed to fix the rate.

A higher export and remittance receipts can emerge as saviour.

“The flexibility in the exchange rate will also help the central bank tackle money laundering.”

Withdrawing the 9-per cent interest rate on loans could be another tool for the BB to make funds dearer and could attract investments from abroad.

When the central bank imposed the cap in April 2020, the interest rates in the major developed countries were around 1 per cent, according to Mansur.

But the rates in developed countries have recently gone past 7 per cent, but the rate is still 9 per cent in Bangladesh.

“This is thoroughly illogical,” he said.

“The central bank should adjust the rates in line with global trends. Otherwise, why would people bring their funds to Bangladesh?” he asked.

Zahid Hussain, a former lead economist of the World Bank’s Dhaka office, also called for measures to withdraw the multiple exchange rates with a view to restoring discipline in the foreign exchange market.